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Sunday, August 26, 2012

What is Investment Link Insurance? Are you really covered for life?


Malaysia financial planner on what is investment linked insurance

Investment-Linked policy (ILP) -  a hot selling product of most life insurance company, it is also most policy holders favorite choice. Most likely when you are approached by an insurance agent, you are presented with ILP. Do you still remember why you got yourself an ILP? Do you understand the risks you are taking all these while as an ILP policyholder? Are you really covered for life? 

What is Investment-Linked policy?
An investment-linked insurance plan is a life insurance that combines investment and protection. Your premiums provide not only a life insurance cover but part of the premium will also be invested in specific investment funds of your choice. You get to choose how to allocate your insurance premiums towards protection and investment. Source: Insurance Info 

Why you buy into a Investment-Linked insurance? 
1) You want the flexibility to choose your own level of protection and investment.
2) You wish to vary the amount of your premium payments of coverage based on your own personal financial situation.
3) You have the flexibility to choose the type of funds based on your risk aptitude.
4) You want a savings plan to maintain your standard of living after retirement. 
Source: Insurance Info  

Potential high returns also come with potential high risk. As the policy's will potentially earn higher returns it also comes with potential investment lost. Unlike a traditional whole life policy, ILP may lapse early in situation of market uncertainty. So it may not be able to cover your whole lifespan even though you have been faithfully paying premium on time. 

Whatever is your reason for taking up an ILP would be, you might or might not be informed that you policy will likely be lapse in the future. An investment-linked policy will probably lapse due to the following unforeseen circumstances: 

1. Rising Cost of Insurance 
As one ages, the insurance cost goes up and eventually exceed the premium paid. (see chart below). When you are young the cost of insurance is small, however this insurance cost will balloon to a shocking amount when you hit age 60 and above. As the policy cash value are unable to sustain the cost f insurance, hence the policy will lapse. You could be left without a life insurance policy due to uninsurable at certain age or health condition. Even if you are insurable at that point in time can you afford the higher premium due to increase in age ?
                                          Malaysia financial planner on what is Investment Link life insurance

2. Investment fund performance 
Each time you pay your premium to your ILP, the premiums are used to buy unit in an investment fund pre-selected by you and then the units are sold to pay for the insurance coverage and other expenses. When the market doesn't performed in favor to your investment strategy, your fund value will decrease accordingly. Once this happen the policy might lapsed due to insufficient of fund value (account value) to deduct necessary insurance costs and other charges.  

3. Increase in policy & fund charges
Unlike a normal whole life policy that comes with minimum guarantee cash values, the
premiums and charges in an ILP are non-guaranteed,where the insurance company reserves the right to change charges. This mean the charges can go up and down. If the insurance company raise charges, it could affect the sustainability of the policy in the long term as cost go up. However, the insurance company need to give sufficient notice to policy holder, usually six month ahead when the changes need to be exercised.

4. Paying ultra low premium
There's no such thing as free lunch. When you are approached by an insurance agent, you are presented with ILP with extremely high protection, and so called the All-in-one policy, which cover for death ; disability benefits, 36 critical illnesses, Female critical illness, Cashless medical card, daily hospital cash allowance, accident benefits, and last but not least with high investment returns, the best part of this policy is only merely of RM 200/ month. However have your ever considered high protection equals high insurance cost and charges ? These low premium too good to be true All-in-one policy can't sustain for    very long and will lead to policy lapse. 

Pointers for ILP policy holder
As a consumer, when you are purchasing a insurance, you are indeed purchase a money contracts that could come to use in the future. Exercise due diligence and ask your insurance agent the following 3 questions :
1. What funds are the ILP invested in , any performance record in the past ?
2. Why are you recommending these funds to me , it is in line with my risk appetite ?
3. How much are the policy & fund charges ?

Final advice
1) Be updated on your fund performance. Review regularly, switch funds if necessary.
2) Look at the illustrations, focusing on the "low" projections and gauge how long your
    policy will able to sustain.
3) Review your coverage as you age and reduce accordingly.
4) Don't overload your policy coverage with minimal premium. It might be cheap now 
    but will it really cheap in future?

3 comments:

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